DLT (Distributed ledger technology) and blockchain notions are relatively similar; therefore, they are often misinterpreted or used as synonyms. However, it is a mistake since the difference between blockchain and DLT is significant. This article will explain each notion, study their connection, and see how DLT is implemented in blockchain development.
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DLT technology development history
Indeed, DLT technology and functioning are straightforward: it is a system that stores data in several storages, while editing data in one storage is changing it in all. Furthermore, DLT usually does not have administrators or centralized storage that manages others. Hence, each node (storage) of the register processes verifies and records information in the DLT database according to general rules (consensus mechanism) employed by all DLT participants.
A consensus mechanism is a set of protocols that allow nodes to agree upon which information to add to the register in a decentralized way. For example, if 51% of nodes approve data, it will be added to the database. There are countless DLT consensus mechanisms, and developers create even more, so there is no point in describing them.
Still, let’s highlight the DLT technology features:
- DLT employment guarantees that information is protected from issues, loss because of breakdowns, or server failures.
- DLT offers enhanced security from unauthorized access since to hack the system requires hacking 51% of network nodes. For instance, if the system has 1000 nodes, the attacker must hack 501.
- A decentralized register increases the security of the entire system and provides ceaseless functioning without idle periods.
Popular DLT forms
Holochain. If not diving into the technical details, this distributed register employs a general consensus model or tokenization concept. Instead, each node receives information for recording it in the DLT and verifies it to meet all network rules. If everything is accurate, the data is introduced to the database, and the partners get notifications. If the rules are violated, the information is declined. If a node acts poorly (distributes fake data, doesn’t function, fails), it gets blocked, and other nodes receive notifications about a bad/unreliable node to avoid its data.
Holochain functioning scheme
Hashgraph. Another popular DLT employs Directed Acyclic Graph (DAG) technology. The article «Comparing Hedera, Hashgraph, Blockchain, and Tangle» explains DAG. Put simply, this technology employs another approach to storing information and consensus; namely, the data is distributed like ‘’gossip’’ between the participants according to specific rules. Hashgraph provides all DLT advantages (decentralization, security) yet doesn’t damage transaction speed that frequently occurs to some blockchain technologies; more precisely, older versions.
Directed Acyclic Graph functioning scheme
Blockchain. Currently, this is one of the most popular DLT variations. It appeared in 2009 (the description was made in 2008 and implemented in 2009) as the fundamental for the first cryptocurrency — Bitcoin. An individual or group under Satoshi Nakamoto's nickname created it.
What is blockchain?
Blockchain is a distributed register that employs cryptography and exceptional architecture for data to create a secure and autonomous database that is a truth source; therefore, blockchain operations don’t require intermediaries to approve its integrity.
The architecture feature is that blockchain data are recorded in layers (blocks), and all layers are stored in a system and overlap. Each layer is a set of transactions during a particular period that are grouped and verified with the consensus algorithm and then added to the system.
As a result, there is a chain of blocks of data sets about transactions in the blockchain’s network; the information cannot be edited or deleted, which is another blockchain feature. Here is how it’s implemented in the scheme:
Blockchain functioning scheme on the example of a Bitcoin transaction. Source
Businesses and individuals can benefit from blockchain solutions development, and integrations.
Increased transparency. Almost all blockchains are decentralized distributed registers with a public transaction history. Anyone can view the transactions of any account within the network that allows any participant to see the interaction (in the case of Bitcoin, see who to who sent funds). Hence, blockchain is transparent in terms of publicity and transaction verification and confidential in terms of counteragents since blockchain doesn’t store personal data of accounts but for the public and private keys.
Reducing fraud risk. Regardless of the business industry (trading, logistics, medicine, concert organization, etc.), integrating blockchain can significantly reduce the fraud risks since the technology allows creating a platform that will accept data from participants in real-time. For example, a logistics chain will provide instant access to all parties. Hence, all parties can track products, transactions, events, etc., anytime they want to.
The information about a transaction in Bitcoin’s network. Source
Enhanced efficiency and speed. A blockchain is also an excellent tool for business process automatization. For this purpose, smart contracts will help. Smart contracts are self-executing computer algorithms that employ instructions for actions; for instance, exchange BTC for dollars, pay tax fees, distribute dividends, or fill out the bill of lading. Smart contracts' feature is that they do not require intermediaries or warrants; hence, they are cost-effective. Furthermore, since these are computer algorithms, they do not care about the mathematical complexity of operations.
Our article ‘’Three types of smart contracts. How to develop a smart contract?’’ will tell you in detail what smart contracts are and how they function.
A logistics blockchain platform, TradeLens, links all participants in transportation to a single information network. Source
Extensive opportunities for data control. A single company manages information in centralized registers. Moreover, users do not have rights or options to manage their user data stored in these registers. In contrast, DLT and blockchain technologies allow people to control their personal information, select what to share when necessary, and limit access or duration when the data is accessible to other parties.
Furthermore, a distributed register can help to track intellectual property rights and copyright for art, products, film, music, and others. NFTs already employ it.
Reducing expenses. Reducing unnecessary costs on intermediaries and warrants and replacing manual work with automatic computer algorithms will increase income and growth. Furthermore, blockchain provides enhanced trust, accuracy, and speed for your business.
Smart contract functioning scheme. Source
Accessibility. Another great advantage of DLT in the blockchain is accessibility; any user can connect to the registered network and employ its functions. There are no permissions, licenses, or verifications required. A cryptocurrency wallet will suffice.
According to Santander FinTech research, blockchain technology can reduce the financial service infrastructure cost by 15 to 20 billion dollars. Source
Popular blockchain types
There are numerous blockchain types. Blockchains are divided into groups on various grounds: centralization/decentralization, kind of consensus, the openness of access, transparency, availability of certain functions, etc. Therefore, we will not mention all blockchain types, just the main variations and those called blockchains, which are actually not (for instance, IOTA and Corda DLT solutions).
The connection between blockchain and DLT
Now, as we know what DLT and blockchain are, let’s see the connection between them before describing key moments in implementing DLT in the blockchain.
Blockchain in the ecosystem of distributed registers
Not considering technical description, blockchain is a part of an extensive DLT ecosystem. Namely, it is one of distributed registers variations (like Porsche 911 Carrera is one of the car models). The critical difference between blockchain differences from DLT is the data structuring method. As it says on the tin, blockchain structures data in chains of blocks that store important system information.
‘’ Each blockchain is a distributed register, yet not every distributed register is a blockchain’’.
‘’ A distributed register is about storing data (on different, frequently far from each other computers), while a blockchain is about the WAY data is reserved (in chains of blocks)’’.
DLT in blockchain development
Implementing DLT in blockchain project development requires critical understanding moments about what DLT solution you want to implement. The following five questions can help you.
First, you must determine the parties employing your distributed register as blockchain. There are two options:
It is also worth noting that permission to join a private registry/blockchain can be granted in two ways; via a safelist or denylist. In the first case, you need to select the group of people and organizations you want to give access to the site, such as only employees of your firm, banks, or residents of a particular country. The second option is to specify those you do not want to give access to your DLT platforms, such as individuals or banks subject to U.S. and EU sanctions.
- A public register. The blockchain is open to anybody, even anonymous counteragents or counteragents under a nickname. Any person can create an account and access the network functions. Examples of such projects are Bitcoin and Ethereum networks.
- A private register. These projects limit access to the blockchain platform. To access the registers user must have permission. There can be several types of licenses; for instance, one to become a regular network participant, the second to become a validator. TradeLens logistics platform is an excellent example of this type of blockchain.
Whom to trust?
Next, you will have to decide what community participants you grant access to to introduce change into your blockchain; and someone to validate the transactions; these can be the same nodes or various groups.
A single responsible participant. These DLTs have a centralized organ that is responsible for introducing data to register and verifying it. This is the most straightforward distributed register option, a centralized system managed by one individual or company.
Several responsible participants. In this DLT approach to blockchain development, the ecosystem is managed by a group of people or companies who vote on all key issues. Such solutions are commonly referred to as consortium blockchain and are typically used to create corporate solutions in finance, logistics, industry, medicine, etc.
Everyone can become a responsible participant. This is the most common implementation of DLT in the development of blockchain projects. In such registries, anyone can become a network member and contribute/validate data to the registry, but only if they meet pre-specified requirements. These requirements are usually related to the configuration of the user's computer (typical for PoW networks) or the number of tokens in the wallet (typical for PoS networks).
No responsible participants. The most complex implementation of DLT/blockchain involves creating a system that does not need humans to enter and validate data. Humans should be replaced either by sophisticated automized algorithms or artificial intelligence.
What is the consensus fundamental?
The next step is to decide how your blockchain community will come to an agreement - which consensus mechanism you will use. There are quite a few, and they all have advantages and disadvantages. For example, Proof of work (PoW) is considered more reliable and secure, while Proof of Stake (POS) is more cost-effective and scalable.
Here is a comparison of the most popular consensus mechanisms:
What will your ledger record?
You also need to characterize the record stored in your register:
- Original records. Information, namely the record itself, appears only when entered into the registry. For example, in the case of Bitcoin, it is transaction data; Ethereum holds transaction data and smart contracts. More complex blockchains can store trade data (what, to whom), multimedia files, patents, certificates, and more.
- Links. These are links to external resources, assets, agreements, or materials that exist separately from the registry and that the registry tracks. A prime example is links to the contents of NFTs or gold certificates (stablecoins tied to the gold exchange rate).
How bright is the register?
The last point to decide on when developing DLT as a blockchain is the complexity/functionality of the platform. Usually, it is a question of whether smart contracts or their counterparts will work on the network. But not necessarily. It could also run parachains, create a multichain system, integrate with external services (banks, government agencies, video games, the Internet of Things), support non-interchangeable tokens, and more.